Case Study of the Week

This case study is based on actual trades using the strategies taught by the team at Options Money Maker.  Our focus is to teach traders a consistent and conservative approach to trading credit spreads, debit spreads and other combination spread strategies to earn higher than average returns.

We believe that there is no better manager of your money than you, armed with the education and experience to create great returns and do it with peace of mind.  We also believe that there is no better way to learn than to “mimic the masters” and then actually do it yourself!  These case studies are designed to be a supplement to your education and show you real examples of the trades we open, close and adjust while minimizing risk, eliminating fear and growing a big account.

Case Study

One of the key strategies we teach our clients is how to keep time on your side.  This is being demonstrated with a current RUT Call credit spread that many of our investors are in at the moment.  This position was opened with a $5 spread at strike prices of 1070/1075 when the index was trading at 1075. There was 4 weeks until expiration and the credit received for this position was $1.40.  The logic behind this position is that we believed that the directional bias of the index was down and a Call credit position takes advantage of a move lower.  We want the index to close below 1070 at expiration and then we would realize the full $1.40 credit received. In reality, we generally do not allow the positions to go all the way to expiration. As time value decays the value of the credit, we close the position prior to expiration once we have a reasonable profit. In this case, we advised our investors to place an order to close the position for $.80 which would be a $.60 profit or 16.6% on cash at risk. By consistently making quick profits like this, reclaiming our cash and entering the next position, we take advantage of the power of compounding.

What happened next…?

Over the course of the next three weeks the RUT index cycled up and down several times but the overall trend was up. This was contrary to the identified bias, but as everyone knows, no one can accurately predict market direction 100% of the time. That is why we build time buffer into our positions. Options and option spreads are not like owning a tangible asset like a stock. They are a like a “melting ice cube … you need to have the market move in your favor or you need to find a way to extend the “melt time” until you have managed to a profit or at least a break even position. Most investors do not know how to do this and simply close the position for a loss.

What Happened Next…?

There are several methods that can be used to manage this position but one of the simplest is what we wanted to share in this case study. That is the process of a simple roll out to an expiration date further out in time. In this case we had 1 week to expiration with the index trading at 1090.  The index needs to move below 1070 for this position to become profitable. That is very feasible when looking at the charts. The strong bias was for the next move to be down. The problem is that the move downward might not happen in the next week. We instructed our investors to roll out the same position one additional week. The cost of this move was $.20 which lowered our adjusted credit to $1.20.  Now we have an additional week for the market to move downward creating a profit.

Some of our investors chose to not only roll out the position and buy more time but also to adjust the strike prices higher to provide a better chance of creating a profit.  The trade off is that the cost of that move is greater and would reduce the adjusted credit to something below $1.20 depending on how high the strikes were set. There is no right answer.  Do what you think is best for your account and never look back!

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